Heinz courts McDonalds to boost ketchup brand

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PITTSBURGH -- Twice a year, Michael Hasco visits McDonald's restaurants to observe how workers squirt ketchup onto hamburgers. He thinks there might be a better way to do it.

Mr. Hasco works for H.J. Heinz Co., the world's biggest ketchup maker. Heinz produces most of the ketchup served in U.S. restaurants, including those of Burger King Corp. and Wendy's International Inc. But the Pittsburgh giant has been locked out of virtually all of McDonald's Corp.'s 13,700 U.S. restaurants since the company failed to give it enough ketchup during a tomato shortage 33 years ago. Now it's Mr. Hasco's job to win McDonald's back.

The 41-year-old vice president of global accounts follows McDonald's officials around the globe, trying to convince them he can shorten lines at cash registers and make it easier for customers to dip french fries in ketchup while driving.

Mr. Hasco has taken Heinz Chief Executive William R. Johnson to a McDonald's to grill hamburgers in hopes of mending the fractured relationship with the fast-food giant. This summer, Mr. Hasco plans to bring McDonald's representatives to a California farm that supplies Heinz to show off the ketchup maker's tomato expertise.

His mission is part of Heinz's broad effort to refocus on its best products -- especially ketchup -- and escape the financial doldrums it and other packaged-food companies have been in for years. Just this week, Kraft Foods Inc. replaced Roger K. Deromedi as its chief executive after he failed to turn around brands and create hot new products.

Decades of adding new brands such as StarKist tuna and 9-Lives cat food built Heinz into a food conglomerate with more than $8 billion in annual sales. But the pantry clutter also distracted it from ketchup.

With Wal-Mart Stores Inc. and other supermarkets giving better shelf space to top brands, Heinz and its peers are trimming their portfolios to emphasize No. 1 and No. 2 brands only.

Ketchup, condiments and sauces produce 41 percent of Heinz's sales and a greater share of profits. Those percentages have risen in recent years as Heinz shed dozens of brands to focus on ketchup and a few other lines. Still, shares of Heinz have fallen about 18 percent since Mr. Johnson became CEO in 1998, and the company's earnings were 19.5 percent lower in Heinz's most recent fiscal year than in the year Mr. Johnson took over.

That has attracted the attention of activist investor Nelson Peltz, who is waging a proxy fight to place himself and four associates on the Heinz board and push for changes he says could double the stock price. His hedge fund, Trian Fund Management LP, wants Heinz to slash spending and consider dumping more brands. Heinz executives call Mr. Peltz's plans unrealistic.

One of Mr. Peltz's complaints: Heinz isn't doing enough to win back McDonald's U.S. restaurants, most of which serve private-label ketchup. The stakes are high. McDonald's uses 250 million pounds of ketchup a year in the U.S. -- equal to about 11 percent of what Heinz sells world-wide. "If you're allowing the biggest ketchup user in the world to serve another brand, a brand that's not Heinz, you're in danger," Mr. Peltz says.

Heinz officials bristle at the suggestion that they haven't pursued McDonald's vigorously enough, and they point out that their ketchup business is otherwise thriving. They've even scored a few coups: In the past two years McDonald's has agreed to replace its ketchup with Heinz at nearly 4,000 restaurants -- in Canada, the United Kingdom, Ireland, Portugal, Spain, Australia, Russia, Belarus and the Ukraine -- saying customers in some of those countries prefer the brand's taste.

In the U.S., however, McDonald's sees no reason to switch. J.C. Gonzalez-Mendez, the chain's senior vice president and chief supply chain officer for North America, says having its own branded ketchup here "is a competitive advantage" that enhances the taste of McDonald's hamburgers and fries.

Heinz is undeterred. "Good relationships take a lot of time and a lot of patience," Mr. Johnson says.

Golden State Foods of Irvine, Calif., says the ketchup it makes for the chain contains one-third more tomato solids than other brands, making it thicker. Mr. Hasco disputes that McDonald's ketchup has more tomato solids. He says Heinz ketchup is distinct from McDonald's because it has a different balance of sweet and sour flavors.

Neither company will comment on what role price has played in their discussions. But McDonald's loyalty to its suppliers is undoubtedly one reason it hasn't switched in the U.S. Golden State -- whose founder, William Moore, made a handshake deal with McDonald's founder Ray Kroc -- depends on the chain for more than 80 percent of revenues, also selling it beef, salad dressings, flavoring syrups and other foods.

Heinz helped create the commercial market for ketchup in 1876 when Henry John Heinz started pouring it into corked glass bottles and delivering it to Pittsburgh grocers using horse-drawn wagons.

By the time he died of pneumonia in 1919, Mr. Heinz had grown his company into one of the world's largest food processors, selling pickles, tomato soup, baked beans and other foods that appealed to housewives who wanted to cut meal-preparation times.

Ketchup became Heinz's flagship product. During World War II, the company advertised that its ketchup added "the raciness of imported spice" to plain foods in lean times. In the 1950s, new fast-food restaurants selling hamburgers and french fries helped turn ketchup into a staple of the American diet, and McDonald's started serving Heinz at its restaurants.

In 1973, a thin tomato crop caught Heinz flat-footed. Unable to keep up with demand, Heinz gave priority to its glass-bottle customers and left McDonald's short. The restaurant chain abruptly terminated its deal with Heinz. Eventually McDonald's created its own brand of so-called fancy ketchup and hired a small group of condiment makers to produce it.

By 2000, when Mr. Johnson added the chairman's title, Heinz had amassed more than 100 brands of everything from poultry to talcum powder. He decided Heinz was spread too thin. Its share of the ketchup market had slipped by about 10 points to just over 50 percent. "You cannot be great at everything," Mr. Johnson says today.

In 2002, he started unloading brands and reshaped Heinz around a new vision: The company would focus tightly on condiments and sauces, frozen meals, snacks and baby food. Mr. Johnson also set out to get the McDonald's business back.

Heinz still had a sliver of the McDonald's business, since a handful of franchisees -- including those in Pittsburgh, Heinz's hometown -- opted to serve the brand. But McDonald's was entrenched with a group of smaller ketchup makers, including Golden State, which had sold hamburger patties to the first McDonald's in San Bernardino, Calif.

Occasional Heinz sales calls weren't getting McDonald's attention. Mr. Johnson turned to Donald Keough, a former Coca-Cola Co. president who sat on the boards of both Heinz and McDonald's. "You have to earn your way back," Mr. Keough recalls telling Mr. Johnson. "You have to be persistent."

In 2003, Mr. Johnson succeeded in arranging a meeting with McDonald's then-CEO Jim Cantalupo at the company's campus in Oak Brook, Ill. To prepare, the Heinz boss learned to grill burgers at a Pittsburgh-area McDonald's. When he met Mr. Cantalupo, "I walked in with my trainee badge and he just burst out laughing," Mr. Johnson recalls. As they developed a relationship, Heinz executives grew optimistic that McDonald's might switch back to Heinz. A McDonald's executive confirms Mr. Cantalupo had warmed to Heinz.

Then in April 2004, Mr. Cantalupo died of an apparent heart attack. Mr. Johnson tried to schedule a meeting with Mr. Cantalupo's successor, Charlie Bell, but Mr. Bell underwent cancer surgery shortly after taking the post, and the meeting never happened. Mr. Bell stepped down seven months after becoming chief executive, and died weeks later.

Mr. Johnson, meanwhile, had already assigned Mr. Hasco to the everyday wooing of McDonald's. Mr. Hasco had worked in a Pittsburgh McDonald's as a teenager.

He decided that, to impress McDonald's, he had to understand its restaurants rather than make a flashy pitch. "We're not going to gain the McDonald's ketchup business through nice dinners in Chicago and golf outings," he says.

Mr. Hasco read two books on McDonald's and dug up files detailing the aftermath of the chain's split with Heinz. He sat in McDonald's restaurants watching customers slather condiments on Big Macs and fries. He set his sights on McDonald's restaurants in Europe.

When McDonald's officials finally visited him at Heinz's London office, Mr. Hasco told them Heinz could package its ketchup in every size McDonald's needed. The McDonald's officials were polite, he says, and told him that they were happy with their suppliers. But Mr. Hasco says he also picked up on some "relationship baggage" left over from the 1970s.

Mr. Hasco began assembling information from customer surveys and taste tests showing that McDonald's patrons prefer Heinz ketchup. He brought McDonald's a ketchup pot that attaches to a French fry cup that would make it easier for customers to dip fries while eating in cars.

On one visit to the McDonald's restaurant near Pittsburgh in 2003, Mr. Hasco noticed that every time a ketchup dispenser ran dry, workers had to go to the back of the restaurant to fill it or reach underneath the counter, cut open a new bag of ketchup and pour it into the dispenser. Mr. Hasco offered McDonald's a bag of ketchup with a hose that connects to a larger reserve of ketchup, saying it would save workers time because it requires less filling. McDonald's rejected the idea, says Mr. Hasco. The chain is testing a new Golden State-made condiment-dispensing system in its stores, according to the supplier.

By 2005, Mr. Hasco was meeting regularly with McDonald's officials. He took them to a Heinz plant in Portugal where he showcased a special seed business that creates proprietary tomatoes. Last year, McDonald's awarded Heinz its restaurants in the U.K., Ireland, Portugal, Spain and Australia -- regions where it had been using various suppliers. A McDonald's spokeswoman declined to say why the company gave the business to Heinz. Mr. Hasco partly attributes the switch to local preferences for the brand.

In a presentation at McDonald's headquarters in May, Mr. Hasco recalls flipping through PowerPoint slides showing Heinz's breeding process for better-tasting tomatoes. He flashed photos of a Heinz research team that includes plant pathologists and tomato breeders. He told McDonald's that Heinz can trace its tomatoes more easily than McDonald's current suppliers -- an attempt to appeal to McDonald's interest in being able to track ingredients in the event of a disease outbreak or other contamination.

John Pooley, Golden State's president of liquid products, says his company can trace its tomato supply too, and that Golden State plans "to continue to execute and exceed McDonald's expectations."

Mr. Hasco says he thinks Heinz is slowly winning over McDonald's. Next month the chain will start serving Heinz in its restaurants in Russia, the Ukraine and Belarus because it no longer wants to manufacture its own ketchup in the region, where it has 205 restaurants. "I'm not giving up," Mr. Hasco says. "It's a marathon, not a sprint."